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BPEA Article

Inflation in Theory and Practice


THE ECONOMIC EXPERIENCE of the past decade has confirmed the
limitations of stabilization policy for slowing inflation. The two recessions
of the decade revealed how costly it is to stop an entrenched inflation
by creating economic slack. Two episodes of massive increase in
energy prices exposed the vulnerability of the average price level to
exogenous supply shocks. And the economy's performance throughout
the decade frustrated attempts to combine price stability with goals for
high employmen that are conventionally accepted and that are based on
observations of the labor market.


Robert J. Gordon

Stanley G. Harris Professor of the Social Sciences - Northwestern University

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